Bluebrook Ltd, Re

This is an application for the court’s sanction of three schemes of arrangement, each of which is between one company and lenders described as Senior Lenders. Those companies are Bluebrook Limited (“Bluebrook”), IMO (UK) Limited (“IMO”) and Spirecove Limited (“Spirecove”). On 3^rd July 2009 Arnold J made an order convening meetings of the scheme creditors, and those meetings took place on 29^th July 2009. At each of the meetings the schemes were approved by a majority which very significantly exceeded the statutory majority, so that the relevant class of creditors approved each of the schemes. Only two members of that class in number, amounting to no more than 5% of the debt, voted against. The present challenge to these schemes comes not from those two creditors, or indeed from any member of the class of scheme creditors. Instead, it comes from representatives of a class of subordinated creditors. They maintain that the schemes operate unfairly to them because they deprive them of any valuable rights against the companies. Whether that is right or not is the question that I have to decide at this stage of the proceedings.

Bluebrook is the holding company of a group of companies which operates the biggest carwash business in the world. The business is operated by a number of subsidiaries in a number of countries around the world. IMO and Spirecove are indirect subsidiaries of Bluebrook. Bluebrook is indebted to a consortium of lenders. This is the Senior Debt, and for present purposes its current amount can be taken as being £313m. The value varies a little depending on the sterling/euro exchange rate. The indebtedness is guaranteed by other companies in the group, including IMO and Spirecove. The indebtedness is supported by a range of debentures under the security so as to charge the value of the group. The lenders under these transactions are called the Senior Lenders.

Spirecove is indebted to another group of lenders, called the Mezzanine Lenders. The level of this debt can be treated in round terms as being £119m (including unpaid interest). Again, that indebtedness is secured by a range of securities covering the assets of the group. The actual trading is carried out by companies lower down in the group. Their various identities do not matter for the purposes of this judgment.

Various subordination arrangements are in place which firmly subordinate the Mezzanine Lenders to the Senior Lenders. The arrangements are contained in an Intercreditor Agreement dated 8^th February 2006 (as amended, restated and supplemented from time to time). I do not need to set out the detailed provisions of that agreement. I can summarise the relevant provisions as follows:

Thus the prospect of recovery by the Mezzanine Lenders is very firmly subordinated to the prior rights of recovery of the Senior Lenders. No-one has questioned the efficacy of those arrangements in the hearing before me.

The funding arrangements which are organised by the Intercreditor Agreement were made in 2006. Since then the group has not performed according to expectations, with the result that interest is now significantly in arrears. The group performance falls short of various targets specified in the Senior Credit Agreement covering the Senior Debt (principally the various financial covenant ratios based, directly or indirectly, on the EBITDA – earnings before interest, tax, depreciation and amortisation). Interest due to the Senior and Mezzanine Lenders has not been paid, and the boards have considered that it cannot be paid fully into the future either. The boards are concerned that they cannot pay debts as they fall due, and that the group is balance sheet insolvent. The group has sought to come to a restructuring arrangement with the Senior Lenders and, for a time, with the Mezzanine Lenders. Negotiations have been in process for some months. The plans involved the Senior Lenders giving up some of their debt in exchange for equity, with the business of the group being transferred to a new corporate structure containing new companies in order to achieve that. The new group would be principally owned by the Senior Lenders; the existing group would not retain an interest. At one stage of the negotiations there was a proposal to allow the Mezzanine Lenders to participate in the form of share warrants, but that was abandoned and since then the proposals that have been made have not included any new rights for the Mezzanine Lenders.

The current proposals are embodied in the schemes of arrangement for which the court’s sanction is sought, coupled with other transactions to give effect to a partial debt-equity swap. Its elements are as follows:

That, then, is where the three schemes of arrangement fit into the restructuring proposals. The overall effect is to transfer all the assets of the group into the new group and to give the Senior Lenders the bulk of the equity in that new group (subject to the small interest in favour of the management). A large part of its debt is novated. No assets will be left in the group in order to pay the Mezzanine Lenders, who are thereby shut out. Justification for that is said to be that the value of the group is such that the Mezzanine Lenders (and any further subordinated lenders) have no economic interest in the group because the value of the assets (or the value of the group as a whole) is significantly and demonstrably less than the value of the Senior Debt.

On the basis of all that, the companies have propounded the schemes and propose to compromise with only the Senior Lenders. They do not seek to enter into any compromise with the Mezzanine Lenders. Accordingly, they are not party to these schemes, and they were not summoned to any class meeting. The case of the scheme companies, and of the Senior Lenders, is that that is entirely appropriate in the circumstances. It is technically not necessary to call a meeting of the Mezzanine Lenders if they are not to be party to the schemes, and none of the companies has to promote a scheme as between itself and the Mezzanine Lenders if it does not wish to do so. So far as the Mezzanine Lenders are concerned, the key step is the transfer of the assets from the present group to the new group. That is not affected by the scheme; it takes effect outside the schemes, albeit it is conditional on the schemes’ being sanctioned.

Many of the Mezzanine Lenders do not accept that the schemes should be sanctioned. They have formed a Mezzanine Co-ordinating Committee (“MCC”) which has been represented before me by Mr David Chivers QC. I can treat the MCC as being synonymous with the Mezzanine Lenders for the purposes of this judgment. They say that the schemes are unfair because they unfairly prejudice them. Their key point is that they do not accept that the value of the group’s assets is less than the value of the Senior Debt. They say that the fair and reasonable thing to do would be to allow the Mezzanine Lenders to participate in the new group by giving them an interest which gives the Senior Lenders the first right to have their debt repaid, and a proper return for their equity, but which does not absorb all the equity after those things have been done. Further, they say that the Schemes should not be sanctioned because the overall arrangements shut out the Mezzanine Lenders from any prospect of benefiting from the assets, and there are sufficient prospects of their having an economic value in them as to lead to their not being ignored in this way.

The Senior Lenders have formed a Senior Steering Committee (“SSC”) to propound the interests of the Senior Lenders. Its representatives hold almost 60% of the Senior Debt, and they were represented before me by Mr Gabriel Moss QC. The scheme companies were represented by Mr Robin Dicker QC.

The scheme companies have procured, or engaged in, various valuation exercises, all of which, if valid, show that the value of the group is very significantly less than the uncontested, and uncontestable, value of the Senior Debt. In those exercises the group, or its holding company, is sometimes identified as IMO, rather than Bluebrook. As long as that is understood, the distinction does not matter. Those exercises were as follows.

PricewaterhouseCoopers LLP (“PwC”) were instructed by the scheme companies and the Bank of Scotland plc (as lead senior lender) to produce a report to analyse the value of the group for the “insolvency practitioner in waiting”, that is to say the person who it was intended to be the administrator in the pre-packaged administration that would intervene if the restructuring took place. They were first instructed on 2^nd March 2009 and carried out their first exercise as at 9^th March 2009. They updated their report in June. The report carried out a valuation of the group on various bases. It is clear that the report valued the group on a going concern basis, and not on a liquidation or even a fire sale basis. That is made clear from the summary of their instructions and their express basis of valuation. The objective was to come up with a figure, or range of figures, for the “Business Realisation Proceeds”, which they define as “the amount that the business is expected to realise in a sale at the current time”. They adopted the following methodologies:

The valuation exercises are conducted, where appropriate, on the basis of certain assumptions – for example an assumption of zero growth in the terminal year (for the DCF calculation) and certain reasoned assumptions as to the Weighted Average Cost of Capital (“WACC”). The assumptions are clearly articulated and the reasons for them are clearly given. Having considered all these matters, and having set out the difficulties in finding proper comparables on the basis of the approach to which they are relevant, the valuation demonstrates the following ranges of estimated Business Realisation Proceeds:

Accordingly, PwC estimate that a purchaser would pay a sum not exceeding £265m for the business.

In considering a way forward, the directors instructed Rothschild to pursue a third party sales process with a view to seeing if a buyer for the existing group could be secured. Details of Rothschild’s activities have been provided. They contacted a number of potential financial buyers, and were in turn contacted by 12 additional potentially interested parties. The process produced only one indicative offer which placed a value on the enterprise of £150m to £188m on a cash and debt free basis. This was not considered by the board to be an appropriate level of interest, or a worthwhile level of cash, to take further.

The third valuation exercise involved instructing King Sturge LLP to value a number of the group’s sites, and then instructing PwC to extrapolate an overall value from the valuation of those sites. The valuation resulting from this exercise was one of £164m on a restricted sales basis (i.e. a swift sale without a full marketing campaign, the sort of thing a mortgagee may be entitled to do) and £208m on a full market value basis.

It will be apparent from those three exercises that they all generate figures which fall well short of the value of the Senior Debt (£313m). Evidence was also given that even if one strips out the “alpha factor” which PwC used, the value is still well short of the level of the Senior Debt. Mr Dicker says that that is the conclusion that I should reach on valuation. He says this is supported by the fact that the valuation of the Senior Debt in the market is, even after the promulgation of the schemes, very significantly below par – currently around 60p in the pound.

In all the negotiations leading up to the schemes, the Mezzanine Lenders did not produce their own valuation evidence in order to justify their stance. However, in the course of these proceedings they have produced some evidence. It is a report from LEK Consulting and is dated 1^st July 2009. It carried out a DCF analysis and comes to the conclusion that:

“The IMO Car Wash business is extremely sound and profitable.”

In paragraph 2.3 it criticises a market price valuation, on the footing that there is no liquid market for an asset such as the scheme companies. In those circumstances a market price valuation is not an appropriate way of ascertaining the value of the group, especially in the current economic circumstances. Criticisms are made of the Rothschild marketing exercise, suggesting that any bids would be likely to be on a “fire sale” basis, that bids would be affected by the difficulty of securing finance for the business and by the general current economic circumstances and that the illiquid market would deter bids. A valuation method based on comparables is said to suffer from an absence of proper comparables, and a break up/liquidation valuation is inappropriate to a sale as a going concern. In the circumstances, LEK consider that the most appropriate method of valuation for the group is a DCF analysis in which the group is valued on an ongoing basis.

The report then goes on to indicate the fruits of such analysis. Any such analysis requires a number of assumptions to be made. In PwC’s analysis they set out those assumptions. The LEK report does not set them out, and they were not provided until the evidential stages of this hearing when it was pointed out that that material was absent from the report. The report does not then go on to set out LEK’s view of the value. Instead, it undertakes a “Monte Carlo simulation” which involves repeated calculation of the DCF valuation, using random sampling of input and assumptions, and then aggregating the result into a distribution of the probabilities of different valuation outcomes “to show the relevant likelihood of this potential set of outcomes”. The result is a graph which is said to show “that in each scenario a significant majority of outcomes exceeds £320m”. The conclusion is expressed that:

“On this basis, it appears highly likely that the value of IMO ‘breaks’ in the Mezzanine tranches of IMO’s current debt structure.”

The report then carries out two other valuation exercises, one a comparable transactions valuation and the other a comparable multiples valuation. The first, using five precedent transactions as a basis for valuation, comes up with a valuation of about £330m. The second is used to provide an indicative valuation to provide “further broad support to the DCF method”. LEK took five comparable public companies from an original set of 12 adopted by Rothschild and PwC, plus another four. They were selected on the basis of having similar characteristics to the group. Various data was extracted from those companies and applied to figures for the group. From this (unreasoned and unsupported in the report) LEK derive “a valuation range whose lower end is in excess of £300m on average, with a median valuation of circa £385m”.

This report is the material relied on by the Mezzanine Lenders in support of their case that they have an economic interest. There was no cross-examination of the author of this report (or of the other reports).

The broad principles on which I should act in determining the dispute between the MCC on the one hand and the company and the SSC on the other were not seriously in dispute, though each side emphasised different aspects. The principles appear in the following paragraphs.

A company is free to select the creditors with whom it wishes to enter into an arrangement and need not include creditors whose rights are not altered by the scheme. This appears from Sea Assets Ltd v Pereroan etc Garuda Indonesia [2001] EWCA Civ 1869 and In re British & Commonwealth Holdings plc [1992] 1 WLR 672. Prima facie, therefore, the company is entitled to select the Senior Lenders as being those with whom it wishes to enter into a scheme and not enter into a scheme with the Mezzanine Lenders as well. Of course, whether that scheme can ultimately be effected, or will be sanctioned, is another matter. At this stage the question is one of choice of counterparty.

Next, in promoting and entering into a scheme, it is not necessary for the company to consult any class of creditors (or contributories) who are not affected, either because their rights are untouched or because they have no economic interest in the company. This is apparent from In re Tea Corporation Ltd [1904] 1 Ch 12, where the Court of Appeal held that the dissent of ordinary shareholders would not stop a scheme being sanctioned, because although those shareholders had a technical interest as shareholders, they in fact had no economic interest in the company because the assets were insufficient to generate a return to them in the liquidation that was then on foot. As Vaughan Williams LJ said (at page 23):

“It would be very unfortunate if a different view had to be taken, for if there were ordinary shareholders who had really no interest in the company's assets, and a scheme had been approved by the creditors, and all those were really interested in the assets, the ordinary shareholders would be able to say that it should not be carried into effect unless some terms were made with them.”

If there is a dispute about this, then the court is entitled to ascertain whether a purported class actually has an economic interest in a real, as opposed to a theoretical or merely fanciful, sense, and act accordingly - see the reasoning in In re MyTravel Group plc [2005] 2 BCLC 123 at first instance. Where things have to be proved, the normal civil standard applies. The same case indicates that the mere fact that the possibility of establishing a negotiating position and extracting a benefit from a deal is not the same as having a real economic interest (though obversely a real economic interest may establish, or enhance, a negotiating position). The basis on which the assessment of that interest is to be carried out will vary from case to case.

The schemes do not involve the Mezzanine Lenders in the sense of engaging them as parties. They will not bind them, and their legal rights are unaffected. The Mezzanine Lenders therefore cannot, and do not, complain as persons whose legal rights are being altered by the schemes in some unfair way. However, they are still entitled to object as creditors on grounds of unfairness if the schemes unfairly affect them in ways other than altering their strict rights. The court is exercising a discretion, and as a matter of principle can consider unfairness in that sense, if it is made out. That is the essence of the case of the Mezzanine Lenders.

The debate before me concerned the grounds of opposition of the MCC. Other questions as to the general fairness of the schemes, and as to the propriety of sanctioning them, were not fully dealt with and I do not propose to deal with that aspect here. Having seen the schemes generally, nothing has yet struck me as to why I should not sanction them if the complaints of, or raised by, the MCC do not stand in their way. The meetings seem to have been properly convened and held, and appropriate majorities of those who were summoned were obtained on the resolutions proposed. Although there was a small number of dissentients, they have not sought to be represented before me. As far as I can see, prima facie it would have been right for me to sanction the schemes if the MCC had not objected. I will not formally determine that at this point, because Mr Dicker told me that there were some minor points that he intended to draw to my attention at that point but which were not dealt with during the course of the two and a half days of the hearing before me (in the interests of saving time and focusing on the major issues). However, I will address the points raised by the MCC on the assumed footing that, absent those complaints, I would sanction the schemes.

The three scheme companies say that the Mezzanine Lenders cannot properly object to the schemes. They are not formally bound by them, and their legal rights are unaffected by them. In the light of the valuations of the assets that have been obtained, the Mezzanine Lenders are not indirectly affected by them either because they have no economic interest in the companies. They accept that if a proper case of de facto unfair prejudice could be shown by the Mezzanine Lenders, or that there has been some other impropriety which has led to unfairness, then that might be a ground for the court’s not sanctioning the schemes. However, the Mezzanine Lenders have not established any such thing. The Senior Lenders support that stance.

The scheme companies and the Senior Lenders also developed points in answer to complaints of the Mezzanine Lenders. One particular point which was emphasised was that the arrangements essentially gave effect to the subordination to which the Mezzanine Lenders had been plainly and freely agreed. I will deal with those points (so far as relevant) in the discussion and narrative that appears below.

The case put against the schemes developed during the course of Mr Chivers’ submissions. In outline it took the following form:

Some of these points tend to inter-relate; some of them have to be considered separately.

A large part of the Mezzanine Lenders’s case depends on what the directors should have done, and various options open to the scheme companies when they started considering the scheme. Accordingly it is necessary to consider what the financial state of the group was or appeared to be.

The Senior Debt and the Mezzanine Debt arose in order to fund the acquisition of the trading arm of the group in 2006, and to provide funds for capital expansion by 31st May 2009. 2008 was not a good year for the group, and its earnings fell significantly short of its business plan. The first half of 2009 was better, in large measure because of the strengthened euro against the pound. Nonetheless, in the second half of 2008 the boards became concerned that the group would breach the financial covenants in the two major credit agreements, which would give rise to events of default. Under the Senior Credit Agreement an event of default entitles the Senior Lenders to call in the debt and declare the security to be enforceable. The boards’ fears were justified and certain ratios specified in the two agreements were inadequate for compliance with those agreements. Since the equity holders did not remedy them, they have become irremediable events of default under both agreements. In addition, interest is now in arrears under both agreements - the group failed to pay interest payments of 13.6m to the Senior Lenders, and £5.4m to the Mezzanine Lenders, when payments were due on 31st March 2009. Further liabilities of almost £1m are due to the Senior Lenders on hedging transactions. Various other events of default have arisen.

The group is now balance sheet insolvent to the tune of over £300m, albeit after a write-off of £360m of goodwill in the accounts. The goodwill that was written off appears to be goodwill arising on the purchase of the group in 2006, being the excess of the purchase price paid over the value of the net assets that were acquired. There was some limited discussion as to the real significance of this insolvency arising as a result of the write-off, and some criticism from the MCC as to correctness of the write-off (or whether all of it should be written off), but the figures show that a write-off of anything over £35m of that goodwill would still lead to balance sheet insolvency. While the group is meeting its trading debts, it cannot pay all its debts as they fall due as is demonstrated by the non-payment of interest, apart from anything else.

The group is still able to trade, and is capable of trading profitably on its trading activities. The mere fact of technical defaults under the major loan agreements does not, of itself, directly affect this. However, there is evidence of increasing difficulties on the trading side too. Some credit insurance has been withdrawn for the UK and France, which impacts on supplier confidence. Difficulties with suppliers are beginning to arise - I was provided with evidence of difficulties in obtaining quotations for long term electricity supplies.

Because of a standstill arrangement with the Senior and Mezzanine Lenders and subsequent forbearance of the former, the group has got sufficient cash reserves to meet its immediate needs and trading liabilities. However, the board has come to the conclusion that a restructuring of the business is required to secure its long term future. Mr Russell, a director of the scheme companies, has said that the boards do not believe that in the absence of restructuring, available cash resources will be sufficient to continue to run the business as a going concern. His first witness statement said that if the present proposed restructuring does not proceed, the boards may themselves have to take steps to place the group in an insolvency procedure. A later paragraph was firmer - he expressed the directors’ view that in the absence of either the present or an alternative restructuring, “they will have to petition for some form of insolvency proceedings for most, if not all the Existing Group companies in order to protect their assets” because enforcement of security would be likely to occur and the level of performance of the group is such that the current level of debt has become unsustainable.

The view that a restructuring is required is shared by the SSC, and indeed by Mr Douglas Evans, an officer of one of the Mezzanine Lenders who has responded to Mr Russell’s evidence. He has agreed that without an appropriate capital restructuring the scheme companies will have a continuing difficulty in satisfying their financial covenants and they need a capital restructuring which reduces the debt on the balance sheet to a sustainable level and which “resets” the financial covenants. The MCC is said to recognise that.

So there was no dispute between the protagonists before me that a restructuring was required. The group cannot carry on as it is. However, I have had to set out some of the background because, despite that shared view, the MCC has suggested that the board should at least have threatened to carry on as things are. I will have to return to that suggestion below.

Various valuations were in evidence. I have described them, and their general effect, above. However, it is necessary to return to them in more detail because value is one of the factors which lies at the heart of Mr Chivers’ case. He says that the evidence shows that there is real value in the companies in excess of the Senior Debt, or what the Senior Lenders are paying under the proposed arrangements (in essence, the value of the Senior Debt less £12m), or at least there is a realistic chance that there is such an excess (which he says is enough for him) and the valuations demonstrate that it is likely that the Senior Lenders will realise that value for themselves. Some of it should have been made available for the Mezzanine Lenders.

Mr Chivers spent a significant portion of his skeleton argument arguing in favour of a going concern valuation as opposed to a liquidation valuation. I agree that, for the purposes of this case, and in order to assess the fairness of the schemes, a going concern value is appropriate, and indeed the scheme companies and the SSC did not contend otherwise. The point has therefore been rendered academic, and is further rendered academic by the fact that none of the valuations produced for the scheme companies is in fact a liquidation valuation in the sense of a break-up valuation. All of the valuations seek to answer the question of what a purchaser would be likely to pay now for the business, and they adopt different techniques for that purpose. The Rothschild exercise was started shortly after the end of March 2009 and ended on 29th May, the King Sturge report was commissioned in May 2009, and the PwC report was commissioned in March 2009 (and updated later).

Those do not, of course, show a valuation which is capable of generating value for the Mezzanine Lenders. However, Mr Chivers relies on the LEK report as showing value for the Mezzanine Lenders. He points out that there has been no cross-examination of any of the valuers on the reports and says that in those circumstances I should treat the LEK report as being at least a reasonable view which cannot be disregarded. That means that there is a realistic view that there is value in the group over the value of the Senior Debt, which gives the Mezzanine Lenders an economic interest in the group.

There was indeed no cross-examination of the valuers, so they have not been tested. In the case of the LEK report the absence of cross-examination also means that, at least to me, some of its methodology, and some inferences from it, remain obscure. However, it does not follow that all of them are necessarily entitled to equal weight. I am entitled to look at them and try to ascertain just what they are saying, in order to determine the extent to which they assist in the relevant debate.

I have already observed that the three exercises conducted for the boards were intended to derive a present value in the sense of the sort of money that a purchaser would pay. They all have their drawbacks, but they are aimed to the same end. Where it is necessary to make assumptions for the purposes of the exercises, those conducting them tend to have made assumptions based on professional and expert judgments as to which are appropriate in the circumstances (those judgments sometimes encompassing a limited range). The LEK valuation is different. Its end result is a statistical analysis, conducted by a computer, in order to assess the statistically most likely outputs for variations in a range of inputs which can be quite wide. It does not involve the sort of judgments that a more traditional valuation requires. That is not to say that there is no judgment at all involved. Judgment is involved in selecting the ranges. Mr Chivers suggested that there was some judgment applied in selecting some weighting within the range, but I confess that I cannot see that in any of the supporting evidential material. Nor does it appear to be the understanding of Mr Merrett, a managing director of Rothschilds who has considered the exercise on behalf of the scheme companies (judging by paragraph 21 of his 3rd witness statement). In any event, judgment lies principally in determining the extremes of the input ranges.

The result is what Mr Merrett, managing director of NM Rothschild & Sons Limited, described as a robotic exercise. He said, and Mr Southern of LEK accepted, that using a Monte Carlo simulation is not often used in valuation exercises. Its use is not unknown in that context - it can be used in specialist circumstances such as a pharmaceuticals company where underlying earnings are uncertain, or in oil companies where the simulation can be used for estimating underground reserves. However, in Mr Merrett’s view that degree of uncertainty does not exist in this case, because there is a relatively well-established business model. Mr Southern, of LEK, says that uncertainty is demonstrated by the uncertainties arising out of the current economic environment, and from the different attempts of the advisers to provide a value for IMO (being the company where the value is considered to lie). That, however, seems to me to be a different sort of uncertainty from that referred to by Mr Merrett. Any DCF valuation is going to have some uncertainties in it - a number of assumptions have to be made as to the future. Yet it is not suggested that a Monte Carlo technique is appropriate to every DCF calculation. Nor is relevant uncertainty (making the technique applicable) demonstrated by the different approaches, or results, of different valuers - that sort of uncertainty is inevitable where professional judgment is involved.

The merits of a Monte Carlo technique are also said to lie in the fact that it produces a range of values, rather than a single point value, and that is said to be appropriate where single point certainty cannot be said to be achievable. I am sure that it is right that a correct approach to valuation in many cases will be to specify a range. Unless the market is tested, and a large number of purchasers all make the same offer, there will always be something of a range. Indeed, the valuations obtained for the group suggested ranges. However, the Monte Carlo technique seems to me to produce not so much a range of values, professionally assessed, but a range of possibilities. From that one may be able to get to a view as to a value, but that is where professional judgment comes in. The results of the application of the technique are not necessarily irrelevant to a valuation exercise, but they are not expressed as a value, and so are of limited use. They might be used as a step towards valuation (when some more judgment has been applied) but they are not themselves a valuation. To some extent the drawbacks of the technique can be seen from Mr Southern’s own evidence. In his first witness statement he said that, if it is of interest to examine a single point estimate, as opposed to a range, of value, then that is available in the form of median and mean values shown (£385m and £398m respectively). That is plainly a mechanical, and not judgmental, assessment, and is highly technical. A proper approach to valuation in a case such as this requires some real world judgments as to what is likely to happen (such as a judgment as to the correct weighted average cost of capital, which is a very important element in a DCF calculation), rather than a range to which other ranges are applied in a series of random calculations to come up with some mechanistic probability calculation. I find the former approach much more helpful and much more relevant.

I confess that I also have misgivings as to the ultimate soundness of the LEK approach from the manner in which it and the supporting material was provided. The Mezzanine Lenders first disclosed that LEK were advising them on 1st June 2009, and their work at that time was said to support the Mezzanine Lenders’ view that the value of the company “breaks in the mezzanine debt”. On 12th June they were asked by the scheme companies’ solicitors for a copy of valuation material relied on. Shortly thereafter the Senior Lenders’ solicitors proposed a discussion between LEK and PwC. The Mezzanine Lenders responded on 21st June that they would let the solicitors know when they believed the meeting to be appropriate. They never did that. On 2nd July the scheme companies’ solicitors repeated their request for the Mezzanine Lenders’ valuation material, and the request was repeated the next day in the light of the fact that it had by then become apparent that the Mezzanine Lenders had received advice from LEK. The response was strange in the light of the clear date of the report - the Mezzanine Lenders’ solicitors said that it would be provided on the date which the court had prescribed for the provision of the Mezzanine Lenders’ evidence (which was 10th July). It was provided with that evidence.

Having got the report, the companies’ solicitors immediately asked for details of supporting material so that the methodology could be understood. The report itself merely states bald conclusions, without detailing the assumptions underlying it. On 14th July the Mezzanine Lenders’ solicitors responded:

“The LEK report is based on underlying data taken from reports produced for your clients and other information supplied by them. As it stands, the LEK report - and more particularly the methodologies employed - is comprehensible.”

That is a very unsatisfactory response. First, it was a very unhelpful response to a perfectly reasonable request. The underlying assumptions are obviously needed if the worth of the report is to be tested. Anyone who really wished their valuation evidence to be understood would have realised that and provided the material. Second (and flowing from the first) the report itself might be regarded as comprehensible as a matter of English, but it would not be fully comprehensible to a valuer in the sense in which a valuer would wish to comprehend it. Again, I would have expected a professional to have realised that. Third, it turns out that the first sentence is not wholly accurate. The underlying data came not only from material emanating from the scheme companies or their valuation reports; it also came from other sources. And anyway, without identifying it, the remark, even if true, is unhelpful. The letter went on to purport to deal with some of the specific questions raised, but not adequately.

Eventually some more useful background material was provided when Mr Southern’s first witness statement was served on or shortly after its date (24th July 2009). However, even then it turns out that the form of the information is a little strange in the circumstances. It is described by him as “the Appendix” to the LEK report of 1st July. Yet the report itself does not purport to contain an Appendix. No document is recorded in it as containing the material on which it is based. The document produced is not an appendix in the sense of being part of the original document, either by annexure or by cross-reference. It is actually in the form of prints of slides in a Powerpoint presentation, although a coversheet has been put on the print (as what is clearly an additional page) which describes it as an appendix and dates it as at 1st July. Its very form and content is that which is appropriate to Powerpoint slides and not to a technical appendix to a technical valuation. Furthermore, there is a page of Disclaimers (page 1 of the pack of slides), which constantly describes it as a “Presentation” and its purpose is “Presentation to the Mezzanine Syndicate dated 1st July 2009”. So its genesis does not seem to have been that of an appendix to the report. That is not to say that it cannot contain the relevant information. It seems to do so (or at least Mr Dicker did not complain that it did not). However, the whole story of the emergence of the report, and then the “Appendix”, and the form that the “Appendix” takes, do not always sit entirely comfortably with the idea that this is a valuable exercise conducted as being the best way of ascertaining the “intrinsic” value of the group and in which the Mezzanine Lenders had confidence.

All in all, therefore, I do not give the LEK valuation as much weight as I give the other exercises. As an exercise of assessing what a third party purchaser would pay it is very unconvincing. One cannot assume that he would pay something in the high probability range. Purchasers do not work like that. Subjective assessments are much more weighty factors, and the scheme companies’ exercises tend to reflect that better. The most that it does in the present case is to give pause for thought on this point: Are the purchasers in fact getting too a good deal (too much unfair value) because in the present market sales are unlikely to take place, and when economic conditions change the same group will be perceived to be more valuable, and the purchasers will ultimately reap the benefit of that? This is not quite the way the case is put, but I can see that in some circumstances it might be. It is, I suppose, another analysis of the “intrinsic value” which is said to differ from current market value.

Having paused for thought, I have come to the conclusion that this evidence is not good enough to establish what the MCC seeks to establish in this case. I do not think that it is a proper way of addressing that point. It is an attempt to play with the same sort of assumptions that are used more conventionally in valuations such as the PwC valuation, but in a more mechanistic way which avoids having to make real judgments in an area in which judgments are very important. It does not, in my view, demonstrate with sufficient clarity that market conditions are currently giving the Senior Lenders an unfairly good deal. There are other ways of dealing with that sort of point. PwC’s approach on their DCF valuation builds in their “alpha factor” - a discount to reflect the fact that a purchaser will pay less in the present market because of economic uncertainties. One can take that factor out again if one wants, and if one does then one still gets a figure which is significantly less than the value of the Senior Debt (as was demonstrated at the hearing).

Does the exercise nevertheless demonstrate that there is a realistic chance that the value of the group is in excess of the value of the Senior Debt, which is one of the ways in which Mr Chivers puts it? For these purposes, again I do not think that it does. It is too technical an approach to engender much confidence. I do not consider that I can conclude that, on a valuation basis, the Mezzanine Lenders are getting a raw deal because there is a good or even reasonable case for saying that they are being deprived of value. The evidence is not that strong.

I have considered this conclusion particularly carefully in the light of the manner in which the evidence has been presented. There was no cross-examination on the valuation evidence, so I must approach a rejection of the evidence with particular care. The absence of cross-examination has meant that my understanding (particularly of the Monte Carlo technique and the limits of its appropriateness) is more limited than it would have been with the benefit of the sort of testing that comes from cross-examination. However, I have to consider the evidence as it is presented to me. The scheme companies have produced expert evidence which is comprehensible and relates to a real point – how much would a purchaser pay for the group now? The MCC has chosen to counter it with a different type of evidence, which does not address that evidence but which seems to carry out a much more theoretical exercise. I do not consider that it is successful in displacing the companies’ evidence (and indeed in some respects it does not seek to do so – it seeks to do something different), or in raising a sufficient possibility of there being some unrealisable value in the group of which the Senior Lenders will be the unfair beneficiaries if the restructuring goes ahead. This also applies to the two confirmatory exercises carried out by LEK (identified above) which featured very little in the MCC’s case.

I have phrased the heading to this section to encapsulate the various ways in which Mr Chivers sought to put his case. He did indeed at one stage put it as high as saying that the boards were in breach of duty to the companies and their creditors, though at others he seemed to be putting it somewhat lower in a sort of “could and should have done better by the Mezzanine Lenders and other creditors” way, stopping short of a breach of duty.

The first thing to note is the late stage at which the breach of duty allegation arose. The point was not made at all in the evidence of the MCC in this case. It was not complained of in pre-trial correspondence either. The only reference to duties was a reminder in correspondence that certain duties were said to be owed, but that was in a different context. On 10th June 2009 the MCC wrote to (inter alia) the directors of Bluebrook and the SSC stating that it had been suggested that the directors were acting in accordance with the instructions of the “Senior Co-ordination Committee” and pointing out that if that were right then the shadow directors would owe the same duties as a de iure director, in the course of which they would owe duties to have regard to the interests of all creditors. All directors were urged to have regard to those duties. This was not a letter complaining about a breach of duty, even though the MCC had known of the restructuring plans for some time. Nor was it really aimed at the board directors as such. Its primary aim was the alleged shadow directors. So this letter does not complain that the directors are not actually fulfilling their duties in agreeing to the scheme. Even more strikingly, the point was not really made in Mr Chivers’ skeleton argument served shortly before the hearing. The closest it got was the last sentence, which says that in looking after the interests of the companies and their stakeholders the boards should be requiring the Senior Lenders to pay a price for the significant benefits they got.

This is not just a forensic point devoid of practical consequences. There is a fairness point, both in a general sense and in a way which has affected the conduct of the case. So far as general fairness is concerned, it was a serious allegation to aim at the directors, who were entitled to more notice of it, and a better formulation of it, than they were given. Such allegations should not really be made on the hoof, and as a matter of analytical convenience, as they were in this case. But more significantly for the purposes of this case, its late emergence meant that the opportunity to have a proper evidential consideration of the point has been lost. It was not disputed that the directors of an insolvent company have to pay proper regard to the interests of the creditors. However, what that duty means in practice will be very fact-sensitive. Here the allegation was (or became) that the discharge of that duty (or the duty to stakeholders, as the letter referred to above put it) meant that the directors ought to have bargained for something to be provided to the Mezzanine Lenders. The companies were forced to deal with the point by looking for material scattered across witness statements which were intended to deal with different points, and the directors did not have the opportunity of putting in a clearly focused evidential rebuttal. This was less than satisfactory, though in the end the position became clear enough. I shall deal below with the extent to which the scheme companies did or did not have a bargaining position, but for present purposes will concentrate on the question of who should have been doing the bargaining.

As I have just observed, there was no evidence from the companies which was focussed on this point. However, such evidence as there is does not support the case that the boards were under the duty alleged. No-one has suggested that those ranking below the Mezzanine Lenders had any economic interest, and in any event I am told that there were no other creditors of these holding and intermediate companies. That means that a duty to have regard to the interests of the creditors other than the Senior Lenders means a duty to act in that manner in relation to the Mezzanine Lenders. However, the Mezzanine Lenders seem at all material times to have been fighting their own corner, and in no way expected the directors to fight for them. They were a separate negotiating party, trying to protect their own interests, and while that might not of itself in every case absolve the directors from trying to take additional steps to protect them, in facts such as the present it goes a very long way. Mr Russell’s first witness statement gives a history of the development of the schemes, and demonstrates that the companies negotiated with both the Senior Lenders and the MCC. At paragraphs 76 to 79 he describes what he believes to be negotiations between the SSC and the MCC to try to reach an accommodation. There is not the faintest suggestion that the MCC was looking to the boards to join in and assist. Those negotiations did not succeed. The boards had had valuation material which suggested that the MCC did not have an economic interest, and negotiated the scheme with the SSC. That material did not make it obvious that the directors should be taking it upon themselves to negotiate an interest for a body of creditors who had not managed themselves to negotiate an interest in direct negotiations. They did not conduct those negotiations. I am not surprised; the directors were not obliged to do so in those circumstances.

The position is even clearer when one considers the evidence from the MCC. Its first witness statement comes from Snr Rafael Jesus Calvo Basarán. He describes the MCC as being appointed “to coordinate the Mezzanine Lenders’ participation in the restructuring of [the group]”. The MCC is said to have continually highlighted that it sought to find a consensual solution that fairly reflects the Mezzanine Lenders’ economic interests, and that it remains committed to doing so. In other words, it is the negotiating party. Other paragraphs describe direct dialogue between the SSC and the MCC. In his first witness statement, Mr Douglas Evans, who has a lead responsibility in the MCC, provides details of other dealings which the MCC has had, or sought to have. No reference is made to an expectation that the boards of the scheme companies ought to be doing more. Any complaints about a failure to agree, or a failure to deal, are made against the SSC.

All this is entirely inconsistent with the idea that the boards should have been negotiating as the MCC now suggests. There is no evidence that the directors were ever asked to do so, or ever had authority to do so, or could have ever have done so without running the serious risk of treading on the MCC’s negotiating toes. On the facts as they appear from the evidence the duty in respect of which the Mezzanine Lenders are said to have been in breach cannot realistically have existed, or at least not in any meaningful sense. Coupled with the valuation evidence, the board would have been entitled to conclude (if they had thought about it) that if the Mezzanine Lenders could not themselves achieve anything, and in the absence of a request to do something, they (the boards) were not obliged to start negotiating something else. Of course, there is no evidence that the boards did think in that way, or indeed what, if anything, the board thought about this aspect of the case, but that is because of the manner in which the point was raised at the hearing, and its timing. I cannot draw any inferences or make any other findings adverse to the directors in the light of those factors.

Nor is it clear what the directors ought to have, or could have, achieved in the circumstances in which they found themselves. It does not seem that they had any bargaining position. Mr Chivers sought to construct one. He relied on the following points which he said should have been considered and deployed as appropriate by the board.

This seems to me to be somewhat unreal. The group was, on any footing, technically insolvent. That does not of itself inevitably require any particular course of action, but it is a starting point for considering the impropriety of continued trading. Some difficulties had arisen in the trading companies - see above. The companies could not, on any footing, keep down further debt as it arose. The directors realised that there were problems, and set about addressing them by engaging in discussions with the lenders. There were, as the directors recognised, events of default under the major credit agreements. They had valuations, none of which suggested that the Mezzanine Lenders had an economic interest in the group. To say that in those circumstances the directors had some bargaining power when discussing with the Senior Lenders is somewhat unrealistic. The directors properly engaged the major creditors in discussions. To start bargaining in those circumstances is odd. And for them to threaten to carry on trading on those circumstances, when they had quite properly recognised a problem about that, would arguably have been to threaten to engage in wrongful trading. There was actually a risk of further deterioration in the position of the trading subsidiaries. Furthermore, Mr Evans has acknowledged in his own evidence for the Mezzanine Lenders that the group would remain in difficulties in complying with its financial covenants and a capital restructuring was required. In those circumstances to say that the board had a negotiating position in that it could have threatened to carry on trading is unreal and inaccurate.

This is not to say that the board had no negotiating position at all. It did not have to do whatever the Senior Lenders wanted. But it was not in a position to bargain for some additional return to other creditors if the Senior Lenders resisted that.

Mr Chivers sought to demonstrate, by reference to Mr Russell’s witness statements, that what the board was doing was giving effect to the wishes of the Senior Lenders. That does not seem to me to be a fair reflection of the evidence. The passages relied on by Mr Chivers show that there were initial discussions involving all the “stakeholders” (including, for these purposes the Mezzanine Lenders), but when they came to naught the directors then agreed the schemes with the Senior Lenders as being the only people whom they, the directors, could see as having an economic interest in the company. This does not amount to looking only to the interests of the Senior Lenders in some culpable way. It is agreeing to a scheme which the Senior Lenders were prepared to agree to, in the belief that the scheme could not affect the interests of anyone else (because of the size of the debt and the value of the assets), in circumstances where the Mezzanine Lenders (looking after their own interests) had not been able to do a deal with the Senior Lenders, and in circumstances in which the Senior Lenders were entitled to clear priority rights over the Mezzanine Lenders. The companies’ agreement to the scheme was in substance acknowledging economic and business realities.

In this context I need to bear in mind the extent to which the boards could be seen to be acting independently. The board of Bluebrook (which can be considered to be the material one for these purposes) comprises 7 directors. 5 of them (including two non-executive directors) will be transferring to the new group once the restructuring is completed. There is a bonus structure in place there which will give the directors significant bonuses, including a bonus if interest arrears are recovered there. Their independence might thought to be impeached, even though Mr Russell deposes to the fact that the board has had independent professional advisers at all times. However, there are two directors who are not transferring and who will not have any relationship with the new group. All board decisions at the Bluebrook level have been unanimous, so those two directors can be taken to have approved the restructuring. They are independent for these purposes, so the schemes have had some independent scrutiny. It is true, as the MCC observes, that there was no committee of independent directors set up to consider the schemes, but the two to whom I have just referred can be taken to have brought an independent judgment to bear. On the facts of this case that, in my view, is enough to deal with any questions of lack of independence which might otherwise arise.

Mr Chivers pointed to other points which supported his allegation of unfairness or which he said indicated that the schemes should not be approved.

He pointed to the £12m of senior debt being left behind in the existing group. He said that this amounted to a hurdle left in the way of the Mezzanine Lenders should a liquidator think about bringing proceedings against one of the professionals based on a sale at an undervalue. The first £12m would still go to the Senior Lenders, so the liquidator would have to be satisfied that the claim was worth more than that before he or she thought it was worth bringing proceedings. It would, and was intended to, act as a disincentive.

The Senior Lenders deny that that is its purpose. It is said by them, plausibly (albeit on instructions, and not as a matter of evidence) that the £12m is left there just in case there is some asset which, unforeseeably, comes in. It is there to enable the Senior Lenders to pick it up - they would have been entitled to the benefit of it had it come in before the schemes. In the light of the overall picture I do not think that I should or can find a sinister import in relation to this factor. In any event I do not understand how the deterrence is said to work unfairly in the first place. The undervalue has to exceed the amount paid by the Senior Lenders before the claim is worth thinking about. The Senior Lenders will have paid £301m (treating the Senior Debt as being £313m). If the assets are worth, say, £320m, generating an undervalue of £19m, then the first £12m goes to the Senior Lenders anyway, leaving £7m for the Mezzanine Lenders. If the £12m had been released and had not been left behind, then the Senior Lenders would have paid £313m. The claim is now worth £7m, which again goes to the Mezzanine Lenders. In other words, a claim has to be worth something to the Mezzanine Lenders before it is worth bringing, and that value to them is the same whether or not the £12m is left outstanding. So that makes it look even less sinister.

Mr Chivers went on to point out that directors of an insolvent company do not owe duties to particular sections of the creditors only, and that a board of an insolvent company cannot insist that the business of a company should survive as a going concern - a dominant intention to preserve the business is not a legitimate consideration. In support of these propositions he cited Re Pantone 485 Ltd [2002] BCLC 266 and Sydlow Pty Ltd v Melwren Pty Ltd (1994) 13 ACSR 144. The first of those propositions is true, but is irrelevant on the facts of this case. The directors of the scheme companies have not sought to act in the interests of one section of creditors at the expense, or to the detriment, of the creditors as a whole. They have entered into arrangements with the section of secured creditors with priority over subordinated creditors who, on the facts as known to them, would not have any interest in the assets because of their subordination. That is entirely different from the situation where directors advance the cause of one creditor at the expense of other creditors who thereby lose a benefit they would otherwise have. The second proposition is also plainly true. Where a company is insolvent, then a consideration of whether or not to try to preserve the business as a going concern or not must be guided by what is in the interests of the creditors and not by reference to some unconsidered dominant intention to do so, or some dominant consideration to do so in the interests of some third party without an adequate claim. In Sydlow there was a finding that the directors had sought to preserve a business not in the interests of the company, but in the interests of a third party whose success they wished to promote. That caused detriment to the company and its general body of creditors. Again, that is not a proper analysis of the facts surrounding the present schemes. The directors were not promoting the continuation of the group business as a going concern in the interests of the Senior Lenders and at the expense of the Mezzanine Lenders. They were assisting in a disposal on a going concern basis in the interests of the company, because it procured a greater level of discharge of debt than would be the case on a break up or insolvency disposition, in favour of someone who was, in effect, the sole beneficial owner of the assets anyway (because of the security and subordination position) and not at the expense of the Mezzanine Lenders at all (because of the valuations and the absence of an economic interest in the asset).

Accordingly Mr Chivers’ follow-up submission fails too. He sought to deploy the principles that he got from those two cases to attack what the explanatory memorandum described as the objectives of the restructuring - to create a new corporate structure for the business with an improved balance sheet, and to avoid the prospect of having to put some group companies into administration or liquidation which, if had occurred, would lead to less recovery for the Senior Lenders than would be the case under the schemes. Since, on the figures (and in particular on the valuation figures which the companies had, unchallenged at the time by any rival valuation from the Mezzanine Lenders) and on the priority arrangements, the Senior Lenders were the only persons interested in the assets, the objectives (shared by the Senior Lenders) were not impeachable on that basis.

Mr Chivers went on to seek to draw some applicable principles from Re Greenhaven Motors Ltd [1999] BCC 463. He relied on it as demonstrating what the court does when a compromise is before it and it does not produce a benefit for the creditors. In that case the court was asked to approve a compromise entered into by a liquidator. The company had no assets. It sought to compromise a possession action brought against it, and a counterclaim against the claimant, by agreeing, amongst other things, to give up the counterclaim. The Court of Appeal said that compromise should not be sanctioned. At the end of his judgment Chadwick LJ said:

“The question for the court is whether a compromise which provides no discernible benefits, but which just might do some harm to the creditors and contributories, should be sanctioned. I am satisfied that that question should be answered in the negative.”

Mr Chivers submitted that this case established that when considering the situation where a corporate entity is releasing its claims, in order to assess the benefit to the company you have to look at the benefit to persons other than the creditor who is “compromising” with the company. You cannot, he says, merely treat the release of a debt against the company as amounting to corporate benefit; there had to be some valuable consideration, and the court had to be satisfied that the value of the asset being transferred is at least equal to the value of the asset being received. On the basis of the evidence, the court could not be satisfied that the assets being transferred were equal to the value of the outstanding Senior Debt.

It was not wholly clear to me whether Mr Chivers was relying on this submission in support of his proposition that the schemes could not amount to a “compromise” within the meaning of the section (as to which see the next section of this judgment), or whether this was a point going to discretion. So far as it was the former, it does not assist him. The case did not decide that the transaction in that case was not a compromise; it held that it was not a compromise which the court should sanction. So far as it raises factors going to discretion, it is operating in a different environment. The function of a court asked to sanction a compromise by a liquidator involves considering whether the interests of those interested in the assets of the company in liquidation are best served by letting the company enter into the compromise, or by not letting it enter into the compromise. This is not the same exercise as a court conducts when considering a scheme of arrangement under section 899. The latter exercise has been set out in a number of well-known authorities, and while the exercise may in some cases share some elements with the liquidation compromise cases, the emphasis and overall issue is different – see for example the formulation by David Richards J in Re Telewest Communications plc (No 2) [2005] 1 BCLC 772 at para 20. One only has to read that formulation, and compare it with Chadwick LJ’s summary in Greenhaven, to see why that is the case.

Section 899 of the Companies Act 2006 provides that parties may “agree a compromise or arrangement” and the court may “sanction the compromise or arrangement”. Mr Chivers submitted that the schemes did not fall within that wording. His first point was that a compromise or arrangement involves an element of reciprocity of benefit, and that in a situation in which one party gives up everything and gets nothing in return then there is no compromise or arrangement. In support of this proposition he relied on In re NFU Development Trust [1972] 1 WLR 1548. In that case the scheme provided that all existing members of a company apart from 5 gave up all rights in respect of their shares, and that on a winding up all surplus assets were to be paid to another body or company having the same objects, or to charity. Brightman J cited In re Alabama, New Orleans Texas and Pacific Junction Railway [1891] 1 Ch 313 and went on to say:

“The word ‘compromise’ implies some element of accommodation on each side. It is not apt to describe a total surrender. A claimant who abandons his claim is not compromising it. Similarly, I think that the word ‘arrangement’ in this section implies some element of give and take. Confiscation is not my idea of an arrangement. A member whose rights are expropriated without any compensating advantage is not, in my view, having his rights rearranged in any legitimate sense of that expression.”

Mr Chivers sought to apply that to the present case.

It does not seem to me that it can be applicable. That was a case in which the members were giving up their rights and getting nothing back in return. If the “right” (if that is what it was) to have surplus assets transferred to another company might be regarded as to some extent a right, Brightman J did not regard it as being one for these purposes. The present schemes are nothing like that. The schemes release the scheme claims, but it is part of an arrangement under which those claims are substituted by new claims against the new group, and the assets of the existing group are to be transferred. True it is that the scheme companies do not themselves promise to do much under the scheme, but the schemes are part of a wider arrangement. The situation is really nothing like that in the NFU case, where there was absolutely nothing passing back to the members. It is right to describe the present schemes as being certainly arrangements, and probably compromises as well. The present case is not a complete surrender.

Accordingly, the schemes within this case are, as a matter of jurisdiction, compromises or arrangements within section 89.

So far I have concentrated on the case of the MCC for saying that schemes are unfair to the Mezzanine Lenders. The scheme companies and the SSC had their own points which they relied on in support of their case that the schemes worked no unfairness towards the Mezzanine Lenders. In many respects they were counterparts to, or answers to, points made by the MCC, but I should deal with some of them.

Their combined cases relied on the following:

I accept all those points, and do not need to elaborate on most of them. However, one or two of them should be dealt with.

The Senior Lenders have decided to run a risk, which is a real one in the circumstances. If the business does not succeed, then they may end up being worse off than they are now. If it does succeed, then they will be better off. It is their decision to run that risk, and neither outcome is certain. It is to be assumed that the Senior Lenders think it is more likely that they will succeed than that they will fail – otherwise they would not enter into the overall arrangements. But there is nonetheless a risk, and it is a real risk to them. It is a risk that the Mezzanine Lenders are not prepared to run themselves – they are not prepared to buy out the senior debt and take over the arrangement. Their response is to say that they should have a slice of the benefit after the Senior Lenders have had a proper return. Their most recent proposals allow the Mezzanine Lenders a return when the Senior Lenders have had an additional return of 19% over 3 years. Mr Dicker submitted that that was not much better than putting the money into a savings account, and there is something to be said for his point. It does not strike me that that is a very handsome return for the risks being undertaken, though I received no evidence about that. However, I cannot make a real finding about it, which illustrates another of the difficulties about the MCC’s approach. They say that I should refuse to sanction the schemes, leaving the parties to negotiate again so that the MCC can seek to agree another deal, and that that is a sensible and legitimate aim. But it does not seem very sensible to me. How am I to know that the MCC will not make unreasonable demands? If it matters, how is the reasonableness of those demands to be measured in the present circumstances? How can I be at all confident that there would not be a full enforcement (which the Mezzanine Lenders could not oppose) with a loss of value to the Senior Lenders and no return at all to the Mezzanine Lenders? The fact is that I cannot. Refusing to sanction the scheme in order to throw the parties into a further negotiation is not a legitimate or sensible use of the court’s power. I have to judge the schemes as they are, on their merits, and either sanction them or refuse to sanction them. If I do the latter, the parties will have to take their own course in relation to future negotiations or future tactics, but that will be the result of a refusal to sanction on grounds other than a wish to generate a further negotiation.

In the light of my findings and determinations above, then as between the scheme companies and the Senior Lenders on the one hand, and the MCC and the Mezzanine Lenders on the other, it seems to me to be right to sanction the schemes, (or at least not to refuse to sanction them) and I so find. The Mezzanine Lenders are not bound by the schemes, and therefore their legal rights are unaffected. So far as it is said that in the circumstances the schemes are part of an overall arrangement which works unfairly to them, I find that they do not. I do not consider they have a relevant economic interest in the scheme companies.

In these circumstances I will go on to consider the remaining matters which have to be considered in order to decide whether or not to sanction the schemes.